Key issues for commercial tenants to consider when a landlord’s ability to forfeit a commercial tenancy for non-payment of rent is reinstated.
Please note that since the below was published on 3 December 2020, the Government has extended the moratorium preventing landlords from exercising forfeiture in respect of rent arrears until the end of March 2021
What is the current position for commercial tenants & landlords?
At the start of the pandemic in March 2020, we saw the first moratorium put in place under the emergency legislation of the Coronavirus Act 2020 which, amongst other things (further details in a previous note we prepared can be found here), sought to protect commercial tenants by introducing a ban on a landlord’s ability to forfeit a lease in the usual way due to the existence of arrears. The initial moratorium was due to end in June 2020, however, it has been extended twice, firstly up to September 2020 and then again to 31 December 2020 under the current extension.
What is due to change?
Assuming that the moratorium is lifted, as currently planned, it will mean that the protection afforded to tenants will end and the usual remedy of forfeiture will be available to landlords, once again.
It is possible that the Government may decide to extend the moratorium again for a third time beyond 31 December 2020, in which case, the prohibition on this landlord’s remedy will continue. There is no definitive indication yet whether this will be the case or not, so we can only assume that it will be lifted and therefore it is sensible to be prepared in any event.
Why does it matter to my business?
If your business is struggling to pay its rent and has fallen into arrears, this will mean that your landlord will have another remedy available to it which it may choose to enforce against your business. Not just any remedy; the ability to end the tenancy and your right to occupy the premises via taking peaceable re-entry of the premises (subject to the terms of the tenancy agreement), which, from a tenant’s perspective, is obviously quite draconian and would have a direct and immediate impact.
It would also be possible again for a landlord to forfeit via Court proceedings, however, assuming there is a right to re-entry in the tenancy agreement, forfeiture via peaceable re-entry is generally appealing to landlords given the relative speed and lower cost compared to Court proceedings . Add into the mix frustrated landlords who have been prohibited from taking possession for most of the year in cases where there are tenants are not paying rent, there is likely going to a decent appetite for utilising peaceable re-entry.
We occupy under a shared space agreement – does this impact my business?
If your business occupies a shared space type office (e.g. a WeWork space) it is more likely that you occupy pursuant to a “licence” rather than a “tenancy” (however, it is worth seeking advice to check if this is the case as it can be a grey area). In which case, the moratorium has never applied to such agreements and the space provider’s remedies won’t have been altered. The agreement between your business and the space provider will determine the position and any penalties regarding arrears and you should seek advice as appropriate.
What should we do and how can my business protect itself?
If the use of your premises is important for your business and you wish to retain it then, subject any change with the current moratorium, you ought to ensure that rent arrears are paid by 31 December to reduce the risk of forfeiture being exercised by your landlord.
It may well be that if your landlord forfeits your tenancy, it would be a welcome step if your tenancy and associated property outgoings having become a burden during these challenging times and you haven’t got a break option or haven’t been able to agree a surrender with your landlord. However, opting for that approach should not be taken lightly as there are other implications, for example, costs for exercising forfeiture that a landlord could claim from you, business continuity and considerations regarding your goods at the premises.
If you are keen to end your tenancy and you don’t have a break right, then we would recommend that you commence without prejudice negotiations as soon as possible (if you haven’t done so already) with your landlord to seek to agree a surrender of your tenancy involving an arrangement regarding the rent arrears and an orderly termination and exit from the premises. The Government issued the voluntary Code of Practice for Commercial Property Relationship (https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic) which encourages collaborative working and provides guidance on how landlords and tenants should work together throughout the pandemic.
If you have already attempted negotiation and the landlord has been unwilling, it may be an indication that the Landlord would not be minded to forfeit your tenancy in any event. However, obviously one can never be certain of that.
In the event that a landlord forfeits your tenancy, there are certain requirements that they must fulfil and obligations they are under and, as such, it is recommended that you take advice on the validity of the landlord’s actions at the earliest opportunity.
It is also sensible to be aware that a landlord still has other remedies at its disposal, some of which have also been restricted but are due to be relaxed on 31 December. In summary the remedies are:
- Forfeiture: It is prudent to note that forfeiture is still available for breaches other than non-payment of rent e.g. failure to disrepair. The process involves the service of a what is known as a “section 146 notice” and, where breach remaining unresolved, Court proceedings would follow.
- CRAR: The Commercial Rent Arrears Recovery process, similar to the old rules of “distress” enabling a landlord to recover tenant goods in lieu of rent arrears. This has still been available during the pandemic, save that the timeframe for recovery has been altered to 276 days’ rent outstanding for notices served between 29 September and 24 December 2020, or 366 days’ rent for notices served from 25 December 2020 onwards. These altered rules are currently due to be lifted on 31 December 2020 alongside the forfeiture moratorium, which would mean that the standard timeframe of 7 days’ outstanding rent would be reintroduced.
- Rent Deposits and Guarantors: It is still possible for landlords to draw down on tenant rent deposits or enforce against guarantors under the tenancy.
- Debt Recovery Proceedings: It is still possible for landlords to issue a claim at Court for the recovery of rent arrears as a debt.
- Statutory Demand & Winding Up Petition: Under the Corporate Insolvency and Governance Act a moratorium exists on presenting winding up petitions until 31 December 2020 (at present) where the pandemic has had a financial effect on a tenant / debtor. It is still possible to serve a statutory demand but it would not be possible for them to form the basis of a winding up petition until after 31 December. In theory, under the legislation, it is still possible to present a winding up petition where a landlord/creditor can demonstrate reasonable grounds for believing that the pandemic has not has a financial effect on the tenant company, however, there is an evidential burden upon the landlord and one which may be difficult to prove.
How can Ignition Law help you?
We are happy to help and support you, which we can do in a number of ways. In the context of the potential moratorium lift explained above we can:
- Advise you regarding your landlord’s remedial options against you in respect of any arrears and how you can mitigate any risks.
- In the event of any remedial action being threatened or taken by your landlord, help you navigate through the process and review the validity of your landlord’s action.
- Help with settlement negotiations.
- Draft a settlement or surrender agreement.
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This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ignition Law for advice relating to your particular circumstances.